3 Experts comment on the June RBA interest rate decision [Video]

The decision by the Reserve Bank Board to keep interest rates on hold today came as no surprise.

To better understand their thinking behind this and the future direction of interest rates, here are 3 experts views:

Martin Lakos ( Macquarie) comment:

It’s Macquarie’s view that the RBA will most likely wait for the next inflation read in July before taking any further policy action, particularly in light of the most recent GDP release showing the Australian economy grew at 3.1% for the March quarter.

Resources exports were the largest component of this growth, as current record levels of commodity production is the end benefit from the investment boom.

However much needed business investment is still noticeably absent.

Short term economic growth

Last month provided the RBA with lots to think about, the weak inflation data and the Federal Budget.

The Australian economy continues to grow, just at a slower pace and well below its long term average growth rates.

Interest rate outlook

While Macquarie has adjusted its interest rate outlook, expecting the bottom of this interest rate easing cycle to reach 1% next year, we have not made significant further downward adjustments in our growth forecasts, which stand at 2.2% for 2016 and 2.5% for 2017.

Eliza Owen (Residex) comment:

The Reserve Bank of Australia has announced it will hold the official cash rate at 1.75% in June, following a 25 basis point reduction in May.

It was widely expected that the cash rate would remain on hold among a few positive indicators, suggesting there was no urgent need for easier lending through a reduction in interest rates.

The first of these was growth in gross domestic product (GDP).

GDP growth in the March 2016 quarter surpassed expectations of 0.7%, expanding 1.1%.

This is the strongest result since the March quarter of 2012.

Ordinarily, such a strong economic growth rate may be accompanied by higher spending and consumer confidence, which may lead to discussions around tightening monetary policy to curb inflation.

However, the GDP expansion was in real terms.

This means that inflation is not taken into account and the measure is looking at the increase in volumes produced, rather than increases in the money earned.

Unusually, real GDP growth was higher than nominal GDP growth for the quarter.

Therefore, the strong increase in real GDP reflected higher production rather than an increase in profits or wages.

This is reaffirmed when looking at the composition of growth; a whole 1% of GDP growth came from higher export volumes.

This may reflect mining companies increasing the volume of exports to compensate for lower resource prices.

Another positive indicator was the unemployment rate, which remained unchanged in April – at 5.7%.

However, as noted in previous months, the composition of employment is limiting to wage growth.

For example, while there were approximately 30,000 new jobs added in April, approximately 20,000 of the positions were for part time work.

Part time employment can return relatively low wages compared to full time work.

One only has to consider Malcom Turnbull’s attitude towards Sunday penalty rates to see the simultaneity of job creation, but lower wages for each employee.

This phenomenon of growing employment and falling wages is one of the main reasons we could expect another cash rate cut some time this year.

Graph 1: Annual Wage Growth and Inflation

Source: Trading Economics

Australia’s wage growth reached a historic low of 2.1% in March 2016.

Wage growth has plummeted since the mining boom began to ease in 2013, which, along with the increase in part time employment, is likely a major contributor to low inflation.

When wages are not growing, household consumption is less likely to grow and inflation falls.

When inflation is subdued, particularly below its 2-3% target band as it is now (1.3%), the RBA is incentivised to cut rates.

Further easing in monetary policy this year may indeed refuel growth in the housing market.

The April quarter saw an increase of just 0.03% in the median Sydney house, while the Melbourne median house fell by 2.63%.

Both markets may see a small value increase in the May data due to the recent rate cut.

Three of the four major banks passed on the full rate cut to their home loan customers in May, and have also seized the opportunity to once again boost their investor lending following a crack down from the Australian Prudential Regulation Authority.

In May, Westpac increased its loan-to-value ratio to investors from 80% to 90% of dwelling values.

Today’s rate decision is the last before the July 2 election, making June a good month to wait and see what economic policies manifest under the new government.

The RBA has left the cash rate on hold today at the historically low setting of 1.75% and mortgage rates are likely to remain at their lowest levels since 1968.

In making their decision the RBA is facing conflicting economic trends.

On one hand we have an economy that is growing at just over 3% per annum, low unemployment and a re-accelerating housing market.

On the other hand the RBA is confronted with a core inflation reading which is at a record low as well as the lowest wages growth on record.

While the decision to hold rates was widely expected, the prospect of a further rate cut later this year is still well and truly on the cards.

If the June quarter inflation data, which is out a week before the RBA’s August board meeting, provides another weak reading, the chances of a rate cut in August are high.

The turnaround in the pace of capital gains across the housing sector is likely to be a concern for the RBA.

CoreLogic reported a 1.6% rise in capital city home values last week, following a 1.7% rise in April.

The stronger housing market conditions have been enough to reinflate the trend rate of growth which is something the RBA and the banking sector regulator are likely to be keeping a close eye on.

Strong housing market conditions probably wouldn’t be enough to block a further rate cut, however, if the renewed growth trend continues, there is the potential for a further regulatory response that could cool housing market demand while at the same time allowing monetary policy to stimulate the broader economy.

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

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